Solid business plans don't guarantee success. But for entrepreneurs with decent ideas, they surely boost the odds.
A good plan accomplishes three important tasks.
First, it aligns the management team toward a common set of goals. Then, once the vision is on paper, it forces the team to take a long, hard look at the feasibility of the business. "A business plan is like a dry run to see if there is a major problem with your business before losing any money," says Mike McKeever, author of How To Write A Business Plan. Finally, a business plan is a sales document: It aims to attract professional investors who may only have time for a cursory glance at each idea that crosses their desks.
The fact is, crafting a meaningful business plan takes thought, time and money. If you farm out the writing, the price tag could run from $5,000 to $40,000, including market research, legal and financial expertise, says Jim Casparie, chief executive of The Venture Alliance, which gives fledgling companies advice on nabbing venture funding. For that, entrepreneurs get a 30- to 40-page document that often obscures even the most fundamental facts about the business--what it does and how it makes money.
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"If, after reading those first few lines, I still don't know what they're doing, that's not a good sign," says Casparie. But it's not just the nuts and bolts that matter, he adds: "You have to tell me in a few lines why you have a competitive advantage in whatever market you're going after, because I need to know why you're going to win. Most plans don't do that."
Here, then, are some highlights of an effective business plan.
Start with a clear, concise executive summary of your business. Think of it like an elevator pitch. In no more than two pages, billboard all the important stuff. At the top, communicate your value proposition: what your company does, how it will make money and why customers will want to pay for your product or service.
If you are sending your plan to investors, include the amount of money you need and how you plan to use it. You have to know the whole picture before you can boil things down, so tackle the summary after finishing the rest of your plan.
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Next, establish the market opportunity. Answer questions like: How large is your target market? How fast is it growing? Where are the opportunities and threats, and how will you deal with them? Again, highlight your value proposition. Most of this market information can be found through industry associations, chambers of commerce, census data or even from other business owners. (Be sure to source all of your information in case you are asked to back up your claims or need to update your business plan.)
While you may have convinced yourself that your product or service is unique, don't fall into that trap. Instead, get real and size up the competition: Who are they? What do they sell? How much market share do they have? Why will customers choose your product or service instead of theirs? What are the barriers to entry? Remember to include indirect competitors--those with similar capabilities that currently cater to a different market but could choose to challenge you down the road.
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Now that you've established your idea, start addressing the execution--specifically, your team. Include profiles of each of your business's founders, partners or officers and what kinds of skills, qualifications and accomplishments they bring to the table. (Include resumes in an appendix.)
If potential investors have read this far, it's time to give them the nuts and bolts of your business model. This includes a detailed description of all revenue streams (product sales, advertising, services, licensing) and the company's cost structure (salaries, rent, inventory, maintenance). Be sure to list all assumptions and provide a justification for them. Also, include names of key suppliers or distribution partners.
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After all of that, one big question still remains: Exactly how much money does your business stand to make? More important, when will the cash come in the door? That's why you need a section containing past financial performance (if your company is a going concern) and financial projections. Three-year forward-looking profit-and-loss, balance sheet and cash-flow statements are a must--as is a break-even analysis that shows how much revenue you need to cover your initial investment.
For early stage companies with only so much in the bank, the cash-flow statement comparing quarterly receivables to payables is most critical. "Everyone misunderstands cash flow," says Tim Berry, president of business-plan software company Palo Alto Software. "People think that if they plan for [accounting] profits, they'll have cash flow. But many companies that go under are profitable when they die, because profits aren't cash."
After you've buffed your plan to a shine, don't file it away to gather dust. "A business plan is the beginning of a process," says Berry. "Planning is like steering, and steering means constantly correcting errors. The plan itself holds just a piece of the value; it's the going back and seeing where you were wrong and why that matters."